Monthly economic update with MLC, June 2018

Funds Management

by Clive Tompkins

MLC Senior Economist Bob Cunneen discusses latest market moves and economic outlook with NAB Asset Management Portfolio Specialist Sinead Rafferty.

Sinead Rafferty: Welcome to this month’s economic update. I’m Sinead Rafferty, Portfolio Specialist at NAB Asset Management, and I’m joined by our Senior Economist, Bob Cunneen. Welcome Bob.

Bob Cunneen: Thanks, Sinead.

Sinead Rafferty: Over the last month or so we’ve seen US equity markets perform very strongly, but in other markets, maybe not quite so well. Can you give us a bit of an overview?

Bob Cunneen: From Wall Street’s point of view, it’s been a very strong performance for May. It was up about 2.8 per cent. So, very favourable profit reports, also a solid US economy, unemployment rate below 4 per cent, indicates America’s doing well. By contrast, Europe struggled. It fell 3.6 per cent in terms of their share market. And what was dominant was concerns about Italy and Spain, and in particular the Italian Government.

Sinead Rafferty: Can you tell us a bit more about the political upheaval that we’ve seen in Italy over the last couple of weeks?

Bob Cunneen: We had an Italian election back in March. And finally we came to a... A provisional Government was proposed, as in a coalition between two perhaps extreme parties. And the perception was that this is going to be a risk to the European monetary system because these parties had proposed both budget and immigration proposals which are very contentious to their European partners. So the concern is that Italy is now potentially an exit from the European monetary system.

Sinead Rafferty: And you also mentioned US unemployment figures. We had a very strong number and so we’re now at levels that we haven’t seen since 1969, down to 3.8 per cent. What do you think the implication is for interest rates in the US?

Bob Cunneen: Well, the implications are for upward pressure on interest rates. Because what you have with such a strong labour market in the United States is that employees now have bargaining power to push for higher wages. And if that’s the case, with higher inflation you have higher interest rates. So this eventually will put pressure on Wall Street, but so far the American Central Bank has preferred to give guidance that they will only gradually raise interest rates. So, for now, we’re in a bit of a holding pattern, but if those inflation pressures accelerate and the risk of higher interest rates materialises, then Wall Street may feel threatened by that.

Sinead Rafferty: What about in Australia? We’ve got the contrary view. We haven’t seen any interest rate moves in quite some time. What’s your view there?

Bob Cunneen: Well, in Australia it looks like the Reserve Bank’s going to be on hold for a considerable period. And that’s because we’ve got very mixed economic data. So if you looked at our labour market -- slowly improving, some very solid jobs growth, but our unemployment rate has been flat. And that reflects there’s more job-seekers out there. We’ve also seen some very encouraging business surveys, which would notionally suggest that the economy’s growth rate is starting to accelerate. But against that, the consumer seems still to be cautious. So, we can see that in very subdued retail spending and very modest consumer sentiment numbers. So, from that perspective, it doesn’t pressure the Reserve Bank to raise interest rates.

Sinead Rafferty: And what about the trade wars? They seem to be back on the radar again. What’s the latest on that?

Bob Cunneen: The Trump administration is going to implement a 25 per cent tariff on steel and a 10 per cent tariff on aluminium. So, this is a concern for trading partners such as Canada and Mexico in particular. But Europe is also concerned, because there’s a potential threat to, say, the European car industry. So from the point of view it’s a major issue for the global economy, because this will slow economic growth, but also if America raises prices, it will push up inflation and therefore may accelerate the interest rate-raising story.

Sinead Rafferty: Thanks for your time, Bob, and thank you for joining us.